Latest Economic and Unemployment Crisis Proposals

Miguel Ángel Blanca Prieto02/03/2010

The Spanish Government, currently the PSOE which is the main centre left party, announced on 1 March 2010 a number of proposals to stimulate the creation of employment and the economy in general. The main proposal is to incentivise property refurbishment which the Government believes will create 350.000 new jobs. Official figures show current unemployment at 20% nationally, (25% in Andalucia).

The Spanish Government, currently the PSOE which is the main centre left party, announced on 1 March 2010 a number of proposals to stimulate the creation of employment and the economy in general. The main proposal is to incentivise property refurbishment which the Government believes will create 350.000 new jobs. Official figures show current unemployment at 20% nationally, (25% in Andalucia)

The Government believes that the extra jobs would be achieved by reducing the VAT rate applicable to refurbishment work from 18% to 8%, and creating additional income tax deductions for those who carry out such work.

It may seem odd that aid is being promised to the construction sector when it was over-construction, ably assisted by the banking community that had lost the plot, that led to the massive overstocking of unsalable new property and resulting economic downturn for Spain. It may seem that the saying 'Too big to fail' applies but the logic is that it is the construction sector that has lost the greatest number of jobs and so it merits special treatment. It also has to be said that the construction sector is particularly labour intensive and so cash spent on this sector should produce new jobs quickly.

In conjunction with this initiative, the Government proposes to enable the Instituto de Credito Oficial (ICO) to grant loans directly to small businesses, bypassing completely, the high street banks which have so far acted as the sole conduit for Government supported lending.

This is in response to the fact that small businesses have found it almost impossible to raise money from the banks, despite the availability of ICO guarantees of up to 100% offered to banks. ICO direct loans would be limited to 200,000 € and it remains to be seen whether the legendary Spanish Government bureaucracy will allow this initiative to be effective.

Sadly, the Spanish Government continues to ignore the recommendations of the OECD and other centres of economic expertise. It is worth remembering that Spain was being warned by the economists many years before the bubble burst that its property sector growth was unsustainable and a danger to the economy of Spain as a whole, but these repeated warnings were ignored by the Spanish Government and the banks.

Most experts believe that the increase in VAT from July 2010 (general rate from 16% to 18%) will have an adverse effect on the Spanish economy as it will reduce consumption. Experts state that the VAT rise should be delayed until the beginning of 2011 or at least until it can be certain that the Spanish economy is improving.

As a short term measure it seems sensible to breathe some life into the construction sector, but it is worrying that the Spanish Government is not recognising the more fundamental malaises of the economy. First on the list should be a fundamental reform of the much criticised Spanish labour system but it seems that this remains off the agenda for the time being. The PP, the centre right party, is now trying to get this issue into debate.

The problem is, as has been seen in other countries, it would be extremely difficult for any political party to grasp the nettle of unpopular policies in view of the inevitable loss of support from a large sector of voters. It seems that the crisis would have to deepen considerably before the Spanish popular psyche would be willing to recognise the damage that is being done by its labour system and put steel into the backbone of Government to do what is so necessary.

Like other countries, pension and social security reform is also on the agenda with much public protest against the proposals to defer retirement age to 67 for men and women (currently 65 for both).

The PSOE led Government does not have an absolute majority because of the Spanish proportional representation system. It has to rely on the support of several minority parties, in particular the Catalan and Basque nationalist parties and so a deepening or extended period of crisis could bring about real change in Spain.

The Minister of Economy, Elena Salgado, recently manifested that the abolition of the taxation of wealth tax was an error, and that if they had known the scale of the crisis at that time, they would have never approved that law change. I wonder if they will regret the VAT increase in the future!.

The only thing that is certain is that 2010 will be an interesting year in Spain!